Approximate Modified Duration
A bond's approximate modified duration is calculated by testing changes in the bond's:
Not exactly.
Although stated in annual terms, approximate modified duration is calculated based on the assumption that a bond's periodicity remains constant.
Not quite.
The approximate modified duration measure is calculated based on the assumption that a bond's coupon rate remains fixed.
That's right!
Approximate modified duration estimates the sensitivity of a bond's price to changes in its yield to maturity and is calculated as
$$\displaystyle \text{ApproxModDur} = \frac{(PV_-) - (PV_+)}{2 \times (\Delta \text{Yield}) \times (PV_0)} $$
where $$PV_0$$ is the current bond price, $$PV_-$$ is the new bond price for a decrease in yield, $$PV_+$$ is the new bond price for an increase in yield, and $$\Delta \text{Yield}$$ is the change in yield. All other variables that can affect a bond's price, such as coupon rate and periodicity, are assumed to be unchanged when calculating its approximate modified duration.
periodicity.
coupon rate.
yield to maturity.
